Mayor, Council reach an accord on tax rise

By Jeff Shields and Marcia Gelbart, Inquirer Staff Writers

Posted: May 12, 2009

Dropping his push for a steep but temporary two-year increase in property taxes, Mayor Nutter yesterday agreed to back City Council's proposal for a five-year sales-tax increase to help close Philadelphia's $1.4 billion budget deficit.

Ending a weeks-long stalemate, the two sides announced a five-year budget deal that also calls for an unusual two-year delay in $230 million worth of annual contributions to the employee pension plan.

"We have collectively engaged in a series of what anyone would consider heavy lifts, and through that process, we are unified in our commitment to the citizens of this city," Nutter said at a late-afternoon news conference, surrounded by 10 of the 17 Council members. "We have found common ground.

Besides the property-tax rise, Nutter had also supported a sales-tax increase for three years and rejected City Council's five-year sales-tax alternative.

"We did hear what the citizens of Philadelphia told us, and today we want them to know that hearing them, we are acting in one voice," Council President Anna C. Verna said. She and Nutter stressed the need for Council and the mayor to speak with a single voice as Philadelphia's budget battle turns to Harrisburg.

The city's plan hinges on what happens in the capital, since the General Assembly's approval is required for the city to increase the sales tax from 7 percent to 8 percent, delay the pension payments, and make other changes to the accounting of the pension fund.

Instead of paying a total of $230 million into the plan in 2010 and 2011 - about 30 percent of the city's total obligations to the pension fund - the city will wait to deposit those dollars until 2012, paying the entire sum by 2014.

Until now, the city had planned to ask the legislature to let it spread its liability for pension payments from 20 years, as is currently the law, to 40 years. The plan as of yesterday cuts that to 30 years, an apparent concession to general concerns of overburdening future generations with pension obligations.

As Nutter acknowledged, the fight in Harrisburg will not be easy - and if the city loses, drastic layoffs and service cuts could be in store for Philadelphia.

"It was difficult before, and it's more difficult now," Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi (R., Delaware), said of the latest proposal, which calls for raising the sales tax for five years instead of three.

He called the request for a pension payment delay "another complicating factor."

While the state House is controlled by Democrats, Nutter would need the Republican-run Senate to support the city plan to win approval.

"We have an open door for the mayor, and do want to work cooperatively with him and City Council on this," Arneson said. "We are just giving an honest assessment on how difficult we think it will be to move this proposal."

As recently as a news conference Wednesday, Nutter had continued pushing for the property-tax increase, which he had been doing since unveiling his budget March 19.

Calling the choices stark, he said then, "We either have dramatically less service, or ask everyone to tighten their belt a little bit for the sake of the great city of Philadelphia."

He had proposed raising property taxes 19 percent in 2010 and 14.5 percent over the current rate in 2011 to generate $271 million.

He also sought to raise the sales tax a percentage point for just three years, increasing it from 7 percent to 8 percent.

But in a remarkable reversal and what appears to be a political comeuppance for the mayor, he agreed yesterday to the five-year sales-tax increase, which would generate an extra $230 million. That money would boost city coffers to help pay the delayed pension contributions.

"I think the mayor blinked, and Council should feel that unity pays off for them," said the city NAACP president, J. Whyatt Mondesire. "And if they can maintain unity they will remain a very powerful check on the mayor's power."

David L. Cohen, chief of staff to Gov. Rendell when Rendell was mayor, called the agreement "a pretty creative and elegant solution to the problem."

Nutter rejected any suggestion that he had changed his mind on the property tax. He said instead the switch was an evolution of discussions between the administration and Council. "This announcement today represents the essence of what public service is about, and that is the ability to compromise," he said at the news conference.

The deal followed a weekend of negotiations between the administration, including the mayor, and Council leadership. Scheduled budget hearings were suddenly canceled yesterday morning as Verna briefed Council members in small groups in her office.

Deferring the pension payments comes at a cost. The city's general fund will have to pay the pension fund about $55 million in interest it would have expected were the payments to be made on time, City Finance Director Rob Dubow said. The pension fund could also lose out if its investments earn more than the 8.25 percent interest rate the city expects to pay.

Still, Nutter said he did not believe deferring the pension payments would hurt the city's bond rating or damage the pension fund.

The latest plan was, in part, met with a degree of skepticism.

"Part of the challenge the city has faced with the pension system in the past is deferring payments for the future," said Steven Wray, executive director of the Economy League of Greater Philadelphia. "So the concern you have on that is if the economy doesn't recover as fast as we all hope it will, we are piling up the bills for future taxpayers even higher."

Similarly, said City Controller Alan Butkovitz, "to defer large chunks based on uncertain contingencies is problematic and raises significant concerns about whether the city will maintain the discipline necessary to make its required payments to the pension fund over time."

Nutter and Council were looking to nail down a deal by Thursday so it could be introduced in Council that day and come up for a final vote on May 21.

As in his original budget, the compromise version would freeze employee salaries for five years, lower city contributions to union health plans, create a host of fees, and implement $300 million worth of service cuts over five years.

It was clear that the collective lack of confidence in the city's property-taxing system as run by the Board of Revision of Taxes had played some role in undermining Nutter's property-tax proposal.

Nutter said he would work with Council to address the BRT as "fast and as responsibly as humanly possible."

City Councilman Jim Kenney expressed relief that a final agreement was at hand. Kenney also said he was relieved that the solution avoided increasing the wage and business taxes, moves he said would have been "a major error." Nutter held the same position.

"It's time to get a workable plan and move on because, frankly, I'm tired of hearing about it," he said. "We got extremely bogged down in this process. . . . I want to start talking about policy and programs and some vision again."